Factors to consider when choosing or changing a business structure
A range of factors come into play when deciding on the best business structure for your requirements. These include:
Many people dream of starting their own business to be their own boss. If this is the case, being a sole trader enables you to stay in control. With other structures, particularly a company, the business is controlled by a board of directors. On the other hand, if you want outside input and to hand over some control, the company structure could be best for you. If you want to share management duties and profits with a partner, a partnership could be the right structure.
How you plan to raise money will determine the best business structure. If you are self-funding to begin a small business, you can start as a sole trader. If you plan to raise money from shareholders, a company would be more appropriate.
Some structures are better at protecting your personal assets. As a sole trader, you have personal liability for everything the business does. So if things go wrong, your personal assets could be at risk. With a partnership, all partners can be liable for the actions of the business. Companies can offer some protection for shareholders from financial and legal liabilities.
Becoming a sole trader is the easiest and cheapest of all the options. With a partnership, you will want to get a legal partnership agreement drawn up which will add to the cost. A company is the most expensive business structure to set up and maintain.
Tax considerations come into play when choosing a business structure. As a sole trader, you cannot divide income for tax purposes. With a company, you get more flexibility with how you are taxed.
Business structure details
Now that we have covered the factors that should be considered when choosing a business structure, we will look at each type of structure in more detail.
This is the cheapest and simplest business structure to set up. As a sole trader, you are the sole owner and have full control of the business. You also assume full liability for any debt or losses. You can’t employ yourself but you can employ workers in your business. You also can’t divide tax, so pay taxes on the profit you make as a sole trader.
Pros of being a sole trader
- It’s the simplest structure to set up and operate.
- You have full control of management and profits.
Cons of being a sole trader
- It’s not a separate business entity, so you are connected to the business.
- You are liable for all debts and legal action that may arise from the business.
With a partnership, you have a group of people who run a business and distribute profit and losses between themselves. A partnership is created when two are more people become co-owners of a business. This structure enables people to combine their resources and assets for better business results.
Pros of a partnership
- Enables people to combine their skills and resources in a venture.
Cons of a partnership
- It’s not a separate entity, so partners are individually or jointly liable for all debts and legal actions.
- There are costs involved in drafting a partnership agreement.
- Partners can have disagreements that damage the business relationship.
With a discretionary trust, a trustee (or trustees) holds the property of the beneficiaries who are usually members of the extended or immediate family. The trustees have the power to decide how the income or capital is distributed among the beneficiaries.
Pros of a discretionary trust business structure
- Ability to accumulate assets for beneficiaries
- Flexible income and capital distribution
- The protection of personal assets
- Tax minimisation
Cons of a discretionary trust
- Setting up a trust can be more difficult and more complicated than setting up a company.
- Beneficiaries won’t always receive a share of the assets because allocation can be changed at the discretion of the trustee.
- It’s not the right structure if you want to attract investors – this best suited for a company structure.
Company business structure
A company is a separate entity that is run by its directors and owned by its shareholders. Being a legal entity, it has higher setup and administration costs than for a sole trader. It is also subject to more regulation under the Australian Securities & Investments Commission (ASIC).
Pros of a company structure
- A company limits the liability of shareholders
- It is able to raise substantial capital
Cons of a company business structure
- You don’t maintain control of the company, as it’s in the hands of the board of directors.
- High setup and administration costs, with larger accountability and reporting options.
- Although there is some protection, directors can be liable for the action and debts of the company.
Changing a business structure
You can change your business structure as your situation and requirements change. There usually is a cost involved and time required to complete the necessary paperwork. When changing the structure of your business it’s best to speak with an accounting or legal professional who can explain the implications of this move.